BG (or Bank Guarantees)

What does a Bank Guarantee or Letter of Guarantee actually mean? In essence it means in the event that a debtor fails to meet their obligation the Issuing Bank is Guaranteeing payment of that obligation or debt. There are myriad of Guarantee Formats, such as direct and indirect, Demand and Performance Guarantees – explained  below. The SWIFT system ensures an easy transfer of Bank Guarantees between banking institutions whereby the Bank issuing the Bank Guarantee (The Issuing Bank), on receipt of instructions received from their client (The Provider or the Applicant), transfers the Bank Guarantee to another bank (The Receiving Bank), in favour of their client (The Beneficiary).

It is appropriate to note the difference between a Bank Guarantee (BG), Standby Letter of Credit (SBLC) and a Documentary Letter of Credit (DLC) as all three instruments have from time to time been mistakenly understood to represent similar payment transactions. This is in fact incorrect as a Bank Guarantee represents SECURITY for a payment and the Documentary and Standby Letters of Credit represent a MEANS of payment.

Regarding all aspects of law regarding Bank Guarantees, these come under the auspicious of the country of domicile of the Issuing Bank, NOT the domicile of the beneficiary bank. Therefore, before each Bank Guarantee is issued all legal ramifications must be examined on a separate and individual basis.

As previously advised in the opening paragraph Bank Guarantees can take on varying forms with different verbiage. An Indirect Guarantee is where the Beneficiary Bank receives a Bank Guarantee, not from the issuing bank, but from the issuing Banks’ correspondent bank. A Direct Guarantee is where the issuing bank issues a Bank Guarantee direct to another Bank. Another guarantee is the Surety Bond or Performance Guarantee and it is important to differentiate between these 2 instruments and a Bank Guarantee. A Bank Guarantee is payable on DEMAND whilst the Surety Bond being a form of insurance is only payable on the fulfilment of certain criteria.

Demand Bank Guarantees are used in conjunction with Collateral Transfer Facilities and are used to obtain loans, capital injections or credit lines often referred to as Credit Facility Guarantees which are worded accordingly… The verbiage used in Demand Bank Guarantees are precise as per ICC Uniform Rules for Demand Guarantees (URDG 760) and payable on FIRST DEMAND.